Silicon Valley Bank: How a tech industry icon collapsed in days?
Quite the biggest news to arise at the beginning of 2023 is the collapse of a few Major American Banks and one of them would be the Silicon Valley Banks. One of the oldest American Banks that soon transformed itself to be the lifeblood of tech startups from all over the world had to fall in March 2023. Its collapse was quick but the problems had laid far before 2023 came along so how did the collapse of Silicon Valley Bank unfolded? What are its implications for the tech sector and beyond?
Silicon Valley Bank: What Happened?
Silicon Valley Bank grew into existence due to its close link with the rising tech startups in the famous area of Silicon Valley. It was incorporated on 17 October 1983 by two former bankers from Bank of America as a wholly owned subsidiary of the SVB Financial Group. Silicon Valley Bank was founded with the main idea of catering to growing and supporting the prospering tech startups around Silicon Valley and seizing the opportunity left by the larger banks.
It announced its IPO in 1988 which raised over $6 Million of Capital and endured a slow growth towards its peak in 2021. Over the years it has strengthened its relationship with Tech Startups and focused heavily on providing savings and loans to tech firms around the world. Some of its major clients include Roblox, Circle, and Vox Media which deposited millions of dollars with the Bank. Silicon Valley Bank was also seen as a stable alternative to other banks as it managed to survive both the Dot Com Bubble, the 2008 Mortgage Crash, and other Recessions over its 40-year journey.
Silicon Valley Bank has been quite the backbone of the prospering tech community as its impacts dated back before Google, Facebook or Microsoft existed but the 2008 financial crash brought in a lot of shock and changes to how a bank operates. One of those regulations was the Dodd-Frank Act which aimed at improving Transparency and Accountability measures with Commercial Bank to avoid another Lehman Brothers moment from happening. This regulation stands for over a decade before it was relaxed during the Trump Administration for firms below $250 Billion of total assets.
Unfortunately, 2020 also brought about the Covid Pandemic and some pointed out that Silicon Valley Bank’s heavy dependence on Tech Firms could ultimately be its undoing as these startup firms would face the heaviest pressure during any recession. Lockdowns not only forced a halt in the economy and as uncertainty grew, it forced the government to intervene to recover the economy from a recession. These measures included stimulus checks and relaxation of interest rates that eventually pumped more money into the economy.
This money had to go somewhere which eventually ended up as savings with the personal savings rate reaching an all-time high of over $2.2 Trillion within the years 2020 and 2021. These two years also saw the best period for the Tech Sector as companies like Meta and Google rose to their peaks with investments greatly pouring into this prospective sector. Prospering Economy and High Savings rate greatly favored the banks, especially Silicon Valley Bank.
Within 2020 and 2021, SVB managed to grow its total deposits from less than $60 Billion to more than $200 Billion as Tech firms looking for a reliable place to store their holdings. SVB also managed to record its highest profits in 2021 and become the 16th Largest US Bank in terms of total assets. SVB managed to triple its stock value within this year and outgrew other American banks throughout this pandemic period as good times continued to roll in.
While this all might be good news for everyone as Stocks and Deposits were high, others are quick to point out that the Banks were growing faster than they should be. It took SVB 36 years to grow to $100 Billion in total assets but less than 1 year to reach $200 Billion and doubts were in place on the structure of the bank itself. Unlike other Banks that can provide loans and deposits to individuals, SVB’s main customers were the Tech Firms themselves, which means that their performance was always heavily dependent on this sector.
Banks all over the world heavily depend on lending as their main source of income and with SVB, their main struggle was their customer base was so niche that they could not find the firms to lend to. These tech firms would rather gather investment rounds from VC than take the high-interest rate from the Bank. This all resulted in SVB suddenly having a huge amount of deposits that they have to lend out or invest somewhere to boost its income.
Their solution resorted to HTM Securities and Treasury Bills which was a long-term, secure and reliable source of income in a Pandemic era. These HTM Treasury Bills were providing over 1.63% in the interest rate and with SVB paying 0.13% to its depositors, it’s an easy 1.5% spread for the Banks to make. These Long Term Securities will then form more than 50% of SVB’s portfolio. This was a smart decision at this point but it will also be its undoing.
As Inflation reached its 40-year High in the US, the government was then forced to take extreme measures to raise interest rates to deter spending. These interest rate hikes affect the Long Term Securities prices inversely as people resort to other forms of investment instruments. Moreover, VC investments in Tech Firms also began to dry up at the end of 2021 which forced these firms to withdraw their deposits from the bank.
Between March and December 2022, SVB saw a decline in Deposits of over $30 Billion and recorded a Net Loss of $1.8 on its 2022 yearly report. Declining Long Term Securities prices paired with Increasing Deposit Withdrawals at the beginning of 2023, forced the bank to sell $21 Billion of its holdings at a loss to raise additional capital as panic spread throughout Silicon Valley. Of course, what usually followed after panic started to brew would be a Bank run as tech firms trickle withdrawals of up to $42 Billion from SVB in a week.
SVB stock (SVIB) also tanked because of this panic by more than 70% in the space of 2 days as Twitter started to ramble upon SVB. With the majority of its holdings tied up in Long Term Securities and Global Tech Firms triggering a bank run, SVB was forced to declare bankruptcy on March 10th, 2023, and caused one of the largest bank failures ever since the 2008 Financial Crash. At the moment of its collapse, it left a permanent scar on the tech sector that was already hurting as more than $151 Billion deposited were uninsured with FDIC.SVB has also been put on sale for any buyers who can resurrect the bank but only its UK arm found a purchase from HSBC.
FDIC currently takes ownership of Silicon Valley Bank as the government ensures that all the depositors will be made whole again but unfortunately, at the moment, there has been no decision to bail out SVB and put an end to its 40 years journey. Its effects are felt by other banks as Signature Bank also follows the same fate and also to the Digital Asset space as USDC falls below the $1 peg.
What can we learn from all this?
Diversification is an important takeaway from the tragedy of SVB as it is the cause behind its downfall. A Bank should always have enough liquidity to keep it afloat during a bank run and that is why it’s important to diversify the portfolio to shorter or medium-term assets. Long Term Securities might be a great and smart way to hedge your deposits due to their security but it’s never a wise move especially if your major customer portfolio is startups.
Tech firms, especially startups are a prospering sector that could grow to become a major phenomenon like Snapchat in 2020 but could also quickly disappear as other competitors caught up to its innovation. In dealing with this a bank should not only know how to accept deposits but also have a proper risk management structure on how to allocate those deposits in the right way. It is quite unfortunate to see a bank that has ridden through the worst times such as a Dot Com bubble but collapses due to a simple concept of resource allocation. It is always mentioned that Recession or Economic downturn will test every company’s risk management structure only the strong can survive and thrive in this situation. The question is then which one will thrive from it?
We from Nagaya Technologies Pte. Ltd surely hopes there is a lesson that could be learned by all of us from this incident. We understand in the development of Nagaya the importance of the factor of risk management which is why we decided to back up each coin with gold to maintain the stability of its value while still allowing it to grow over the long run. This hybrid concept of cryptocurrency is the first of its kind in the space and we hope that it could deliver massive sustainable value to all of you. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at https://www.nagaya.co
Or you can talk to us at t.me/nagayaofficial
